Epari Chinna Krishna Moorthy vs State of Orissa
Rewritten Version Notice: This is a rewritten version of the original judgment.
Court: supreme-court
Case Number: Writ Petition Nos. 125-135 and 233 of 1963
Decision Date: 12 March, 1964
Coram: P.B. Gajendragadkar, K.N. Wanchoo, J.C. Shah, N. Rajagopala Ayyangar, S.M. Sikri
The case was styled Epari Chinna Krishna Moorthy versus the State of Orissa, including a connected petition, and the judgment was delivered on 12 March 1964 by the Supreme Court of India. The judgment was authored by Justice P. B. Gajendragadkar and the bench was composed of Justices P. B. Gajendragadkar, K. N. Wanchoo, J. C. Shah, N. Rajagopala Ayyangar and S. M. Sikri. The petitioner was identified as Epari Chinna Krishna Moorthy, proprietor of the business known as Epari Chinna, while the respondent was the State of Orissa. The official citation of the decision is 1964 AIR 1581 and it also appears in the Supreme Court Reports as 1964 SCR (7) 185. Additional citator references include RF 1972 SC2455, R 1976 SC 182, and MV 1985 SC 421. The issues for determination involved fundamental rights, a government notification that exempted certain articles from sales tax, the petitioner’s claim of exemption under that notification, the subsequent Validation Act of 1961, the retrospective operation of the legislation, and the question of whether the enactment was unconstitutional. The statutory framework relevant to the dispute comprised the Orissa Sales Tax Act, 1947 (Act 14 of 1947), specifically section 6, and the Sales Tax Validation Act, 1961 (Act 7 of 1961), especially section 2, together with Articles 14 and 19(1)(g) of the Constitution of India.
The factual background disclosed that the petitioner was a merchant dealing in bullion, specie, and gold and silver ornaments, and that he was registered as a ‘dealer’ under the Orissa Sales Tax Act, 1947. Exercising the authority conferred by section 6 of that Act, the State Government issued a notification on 1 July 1949 which exempted certain articles from the operation of the charging provision of the Act. The notification specifically provided that gold ornaments would be exempt from sales tax whenever the manufacturer who sold them separately charged for the value of the gold and for the cost of manufacture. Acting on this basis, the petitioner filed his tax returns before the Sales‑Tax Officer and claimed the exemption provided by the notification. His claim was accepted up to June 1952. Later, however, the assessments were reopened under section 12(7) of the Act on the ground that the deductions claimed on certain sales of gold ornaments were not justified and that the petitioner had escaped assessment. The petitioner maintained that he was entitled to the exemption because he fell within the class of manufacturers described in the notification. The Sales‑Tax Officer rejected this contention, and the petitioner appealed the decision. Both appeals were dismissed. While these appeals were pending, similar assessments concerning other dealers, including the petitioner, were challenged by writ petitions before the High Court. The High Court ruled in favour of the petitioner and issued writs directing the Sales‑Tax Officer to allow the petitioner’s claim for exemption. After the High Court’s judgment, the legislature enacted the impugned Act on 1 August 1961, which was published on 18 September 1961. The Act contained a single operative provision in section 2, which declared that notwithstanding any judgment, decree or order of any court, the word “manufacturer” appearing opposite item 33 in the schedule to the Government notification dated 28 July 1947, as amended by the notification of 1 July 1949, shall be deemed to have always meant the definition subsequently set out.
The provision defined “manufacturer” as a person who, by his own labour, works up materials into suitable forms, and also as a person who owns or runs a manufactory for the purpose of business with respect to the articles manufactured therein. The validity of this definition was challenged in the writ petition before the Court.
The petitioners advanced three principal submissions. First, they argued that the exemption had been granted by the State Government under the powers conferred on it by section 6, and therefore the legislature could not retrospectively withdraw that exemption. Second, they contended that the provision in section 2 of the impugned Act was discriminatory and thus violated the guarantee of equality before the law contained in Article 14 of the Constitution. Third, they maintained that the retrospective operation of the impugned section should be struck down as unconstitutional because it imposed an unreasonable restriction on the petitioners’ fundamental right guaranteed by Article 19(1)(g).
The Court considered these submissions and delivered its holding. It observed that the purpose of section 2 of the impugned Act was merely to clarify the intention of the earlier notification. The Court noted that even if the State Government possessed the power to grant or withdraw the exemption, such a power did not diminish the legislature’s competence to enact any provision relating to that exemption, whether prospectively or retrospectively.
Further, the Court examined the effect of the notification as interpreted by section 2 of the Act. It held that the notification benefited artisans who produced ornaments themselves and persons who operated manufactories. Consequently, the main object of granting the exemption was achieved by interpreting “manufacturer” to include either a true manufacturer or a person who engages artisans to manufacture gold ornaments. The Court pointed out that, in the present case, the petitioners were not directly involved in the production of ornaments and, as they admitted, did not manufacture the ornaments themselves. Therefore, the persons who obtained the benefit of the exemption under the provisions of section 2 could not be said to belong to the same class as the petitioners. The two categories were distinct, and there was no similarity between them; as a result, the argument based on Article 14 did not survive.
The Court also rejected the contention that the retrospective operation of the provision rendered the legislation invalid. It held that it would be difficult to accept the proposition that a retrospective operation, even if it operated harshly in some cases, automatically invalidated the legislation. In the facts of the present case, the Court found it impossible to conclude that making section 2 retrospective imposed an unreasonable restriction on the petitioners’ fundamental rights under Article 19(1)(g) or that such a restriction was against the interest of the general public.
The judgment was delivered in the original jurisdiction of the writ petitions numbered 125 to 135 and 233 of 1963, which were filed under Article 32 of the Constitution of India for the enforcement of fundamental rights. The petitioners were represented by counsel for the writ petitions numbered 125‑135 of 1963, while the State was represented by counsel including the Solicitor‑General and other appointed advocates.
Counsel for the respondents appeared on behalf of the State in writ petitions numbered 125 through 135 of 1963, while counsel for the petitioner represented the petitioner in writ petition number 233 of 1963; counsel for the respondents also appeared in the same petition number 233. The judgment was delivered on March 12 1964 by the Chief Justice. This collection of twelve writ petitions posed a single question concerning the validity of the Orissa Sales Tax Validation Act, 1961 (Act No 7 of 1961), which will be referred to as the Act.
The petitioners relied on substantially similar facts, and therefore the Court will describe the factual background by referring to the first group of petitions, namely writ petitions numbers 125 to 135 of 1963. In this group the petitioner was Shri Epari Chinna Krishna Moorthy, who was the proprietor of the firm Epari Chinna Krishna Moorthy & Sons, located in Berhampur, Orissa. He conducted a trade in bullion, gold and silver ornaments, and consequently he was registered as a “dealer” under the Orissa Sales Tax Act, 1947 (Act No 14 of 1947). After the enactment of that statute, the Government of Orissa, invoking the authority granted by section 6 of the Sales Tax Act, issued a notification that exempted certain articles from the levy of sales tax. The notification specifically provided that gold ornaments would be exempt from sales tax provided that the manufacturer who sold them presented the value of the gold separately from the cost of manufacture. This notification was issued on July 1 1949.
During the ordinary course of his business, the petitioner supplied gold to artisans, supervised the preparation of ornaments, and thereafter sold the finished items in his shop, always showing on his invoices the value of the gold and the cost of manufacture as distinct components. On the basis of this practice, the petitioner claimed that he fell within the class of “manufacturers” described in the notification and therefore was entitled to the exemption. Accordingly, he filed his sales‑tax returns before the Sales‑Tax Officer at Berhampur and claimed exemption on the sales of the gold ornaments. Up to June 1952, the officer accepted his claim, allowing the exemption and deducting the value of those sales from the taxable turnover reported in the petitioner’s returns.
Subsequently, however, the earlier assessments were reopened under section 12(7) of the Act. The reopening asserted that the deductions claimed in respect of certain gold‑ornament sales were not justified and that, as a result, the petitioner had escaped proper assessment. The petitioner contested this reopening, maintaining that he was a manufacturer as contemplated by the notification and therefore his claim to exemption was lawful. The Sales‑Tax Officer rejected the petitioner’s argument and proceeded to levy tax on the disputed sales transactions. The petitioner responded by filing appeals against the officer’s decision.
The appeals filed by the petitioner were dismissed, and while those appeals remained pending, other dealers—including the petitioner—challenged similar assessments by filing writ petitions before the High Court of Orissa. The writs were numbered 151, 161, 162, 204‑209 and 110 of 1957. The Division Bench of the Orissa High Court that heard these writ petitions ruled in favour of the petitioner and issued appropriate writs directing the Sales‑tax Officer to permit the petitioner’s claim for exemption under the notification in question. The principal issue before the High Court concerned the exact meaning of the word “manufacturer” used in the notification. The Court held that “manufacturer” denoted the first owner of the finished product, whether the product had been made by his paid employees or by independent artisans who received raw materials and labour charges from him. Accordingly, the Court found that the petitioners before the High Court were manufacturers and, as such, were entitled to claim exemption on the sale of gold ornaments that they had made. This judgment was pronounced on 13 March 1959. The State of Orissa filed appeals against that judgment, which were listed as Civil Appeals Nos. 92 to 94 of 1963, and those appeals remained pending disposal. Subsequent to the High Court’s decision, the Orissa Legislature enacted the impugned Act on 1 August 1961; the Act received the Governor’s assent on 10 September 1961 and was published on 18 September 1961. The Act contained a single operative provision in section 2. Section 2 provided that, notwithstanding any judgment, decree or order of any court, the word “manufacturer” appearing in item 33 of the schedule to the Government of Orissa’s notification dated 28 July 1947, as amended on 1 July 1949, shall be deemed to mean a person who, by his own labour, works up materials into suitable forms, and a person who owns or runs a manufactory for the purpose of business with respect to the articles manufactured therein. The petitioners challenged the validity of this section. The Court observed that the purpose of section 2 was to clarify that the legislature did not intend, as the High Court had held, to include all first owners of finished gold products within the notification. Rather, section 2 indicated that the legislative intent was to grant the exemption only to persons who personally worked and produced gold ornaments or who owned or operated a manufactory for the business of manufacturing those articles. In other words, the Government’s intention in issuing the notification was not to extend the exemption to traders or shop‑keepers who acted merely as commission agents and who neither personally manufactured gold ornaments nor owned a manufactory employing artisans for that purpose.
In this case, the Court noted that the provision under section 2 of the impugned Act was intended to limit the exemption to persons who actually manufacture gold ornaments or who own a manufactory that employs artisans for that purpose. Consequently, the provision did not extend the exemption to traders or shop‑keepers who acted merely as commission agents and who neither personally fabricated gold ornaments nor owned a manufactory employing artisans for that purpose. The Court observed that if the provision is held to be valid, the petitioners cannot claim the exemption because they fall outside the defined class. Conversely, if the provision were declared invalid, the petitioners would be regarded as the first owners of the gold ornaments and could potentially claim the exemption. Counsel for the petitioners argued that the exemption had been granted by the State Government under the authority conferred by section 6 of the parent Sales‑Tax Act, and therefore the legislature could not retrospectively remove that exemption. Section 4 of the same Act was identified as the charging provision, while section 6 empowered the State Government to issue a notification exempting the sale of any goods or class of goods, and also to withdraw such exemption subject to conditions and exceptions deemed appropriate. The counsel contended that, because the power to grant the exemption was exercised by the State Government, the legislature could not retrospectively invalidate the notification without rendering it void. The Court rejected this submission, explaining that the legislature’s purpose in enacting section 2 was simply to clarify the intention of the notification, namely that the exemption should be confined to those who actually produce gold ornaments or employ artisans for that purpose. The Court further held that the legislature’s competence to make prospective or retrospective provisions was not affected by the State Government’s delegated power to grant or withdraw exemptions, and therefore the argument that the retrospective operation of section 2 was invalid lacked any substantive basis.
The Court then considered the second argument raised by counsel for the petitioners, which claimed that section 2 was discriminatory and violated the equality clause guaranteed by Article 14 of the Constitution. The Court observed that it was undisputed that the petitioners belonged to the class of traders or shop‑keepers who functioned as commission agents. These individuals supplied gold to artisans, paid the artisans for their labour, and collected a commission on the finished ornaments before selling them to customers. The Court pointed out that the petitioners did not engage directly in the manufacture of gold ornaments, nor did they operate manufactories where artisans were employed for production. The respondent State had submitted an affidavit indicating that the petitioners sometimes sold goods manufactured outside the State of Orissa and had never themselves manufactured ornaments. Whether the gold supplied to the artisans was the petitioners’ own or provided by customers was deemed irrelevant, because the critical factor was that the petitioners were not directly involved in the production process. Accordingly, the Court concluded that the persons who could benefit from the exemption under the notification, as delineated by section 2, could not be placed in the same class as the petitioners. As a result, the contention that the provision infringed Article 14 could not be sustained.
In this case the Court observed that it is not easy to argue that the class of traders described by the petitioners belongs to the same category as persons who actually produce gold ornaments themselves. The Court added that the category also includes persons who operate manufactories where artisans are employed for that purpose. The respondent State, through a counter‑affidavit, stated that the petitioners sometimes sell goods manufactured by firms outside the State of Orissa. The affidavit further asserted that the petitioners have never engaged in the manufacturing of ornaments themselves as part of their business activities. The Court noted that it is irrelevant whether the gold supplied to the artisans comes from the traders’ own stock or from customers. What matters, according to the Court, is that the traders are not directly involved in the actual production of ornaments. The traders themselves have admitted in their statements that they do not personally produce any of the ornaments. Therefore, persons who receive the exemption under the notification pursuant to section 2 of the impugned Act cannot be said to belong to the same class as the petitioners. Consequently the petitioners’ principal argument that the classification violates the equality guarantee of Article 14 loses its foundation in the Court’s view. One of the purposes of the impugned Act, the Court explained, is to aid goldsmiths who actually fabricate gold ornaments. That purpose can be achieved only if the exemption is granted to persons who keep artisans continuously employed for the production of gold ornaments. A person who manufactures gold ornaments personally, or who employs artisans to do so, falls within the protection of the exemption. The petitioners, however, do not maintain any artisans in continuous employment for the purpose of producing ornaments as part of their business model. Accordingly, if the legislature chose not to extend the exemption to them, the classification retains a rational connection with the legislative objective. The argument that the petitioners belong to the same class as those eligible for the exemption therefore assumes a similarity that the Court has already rejected. The Court emphasized that the two categories are distinct and lack any substantive likeness in terms of their involvement in ornament production. It was also suggested that the provision deprives poorer artisans who work on a small scale of the exemption, a claim the Court found to be unfounded. The Court noted that the notification, as interpreted by section 2, benefits artisans who produce ornaments themselves, covering a large number of independent craftsmen. It also benefits persons who operate manufactories and thereby maintain artisans in continuous employment for the ongoing production of gold ornaments.
The provision was intended to ensure the continuous employment of artisans. Accordingly, the Court observed that the principal purpose of granting the exemption could be realised by interpreting “manufacturer” to include either a manufacturer properly so called or a person who engages artisans to manufacture gold ornaments. Counsel for the petitioners also contended that the retrospective operation of the impugned section should be declared unconstitutional because it imposed an unreasonable restriction on the petitioners’ fundamental right guaranteed under Article 19(1)(g). The Court noted that, in evaluating whether the legislative power to enact a law retrospectively has been exercised reasonably, it is necessary to examine the manner in which the retrospective operation functions. However, the Court found it difficult to accept the proposition that the mere possibility of harsh effects in some instances renders the legislation invalid. Moreover, in the present case the retrospective operation did not extend over a very long period. The record did not clearly demonstrate that the petitioners failed to recover sales tax from their customers when they sold the gold ornaments. The respondent‑State, in its counter‑affidavit, asserted that even where sales tax was not shown separately, the price charged effectively included sales tax because it was the usual practice of every registered dealer engaged in similar business to collect sales tax either by displaying it separately—thus claiming a deduction of the tax from gross turnover to arrive at taxable turnover—or by incorporating it into the price and collecting it as part of the amount charged. After considering these submissions, the Court concluded that, under the circumstances of this case, it could not be held that making the provision of section 2 of the impugned Act retrospective amounted to an unreasonable restriction on the petitioners’ fundamental right under Article 19(1)(g) and that such restriction was contrary to the public interest. Consequently, the petitions were dismissed, with the petitioners ordered to bear one set of hearing fees and the costs of the proceedings.